Friday, December 19, 2014

Maryland Must Fix Its Budget Shortfall Before It Adds to the Long-Term Debt

Maryland’s Governor-elect Larry Hogan certainly has his hands full as he prepares to take office in January. Maryland tax revenues are expected to be $1.2 billion less than expenditures over the next 18 months, but this shortfall can be fixed, or at least reduced, before it adds to Maryland’s long-term debt.
This could be a tall task for Mr. Hogan since he promised during his gubernatorial campaign to cut at least some of the various taxes raised under Governor O’Malley. But Barry Rascovar said in a recent article in the Maryland Reporter that the task is “easy.” While not necessarily agreeing with Rascover’s general prescriptions, his suggestion that the Hogan Administration base the budget on the prior year’s revenues, rather than projections that often turn out to be overly optimistic, is worth considering. This method should provide a greater amount of certainty about how much money will be coming in and thus increase the chances of running a balanced budget. Although Maryland needs to run a budget surplus in order to decrease its current $48 billion debt, balancing the budget would at least be a step in the direction of addressing the shortfall.
If Mr. Hogan implements tax cuts as he promised, the previous year’s tax revenues could be less than the current year’s. Therefore, economic models could be used to estimate the amount the previous year’s tax revenues would have been if the Hogan tax cuts were already implemented. Then, the budget expenditures could be reduced to match that amount. Cecilia Januszkiewicz, a former Free State Foundation Senior Fellow and former Secretary of Maryland’s Department of the Budget, wrote a Perspectives from FSF Scholars in March 2008 entitled “The Illusion of Declining Revenues, Reduced Spending.” Ms. Januszkiewicz said that there is an illusion within Maryland (that still remains six years later) that tax revenues are decreasing with each year, but in actuality, it is only the growth rate of tax revenues that is sometimes decreasing. Therefore, keeping the reduced budget expenditures constant for a few years while revenues continue to grow is at least an admirable approach to eliminating the shortfall and lessening long-term debt.
Maryland’s Spending Affordability Committee is required “to limit the growth of State spending to a level that does not exceed the rate of growth of the State’s economy.” Cecilia Januszkiewicz criticized this “spending affordability” process in a July 2008 Perspectives from FSF Scholars entitled “Avoiding Structural Deficits in Maryland: Recommendations for Reform,” because it does not take into account the decreasing growth of tax revenues. She also suggested many simple ways to reform Maryland’s budget process such as: requiring fiscal estimates for each proposed law to be available to the public at least two days before the first hearing on the legislation. (See here for more valuable recommendations.)
There are many things Maryland officials should do in order to balance the budget over the next year without Mr. Hogan having to break his promise of cutting taxes. Ongoing budget deficits are detrimental to the economy and society, not only because government spending slows down economic growth by crowding out private investment, but also because a deficit today means a surplus will be needed in the future to offset the debt. This places the burden on future taxpayers, whether they are currently children, foreigners, unborn, or already paying taxes. Running a budget deficit is the definition of taxation without representation. 

Wednesday, December 10, 2014

CRomnibus Would Extend Ban On Internet Taxes For One Year

A new spending bill of $1.1 trillion was released on Tuesday and is being referred to as “CRomnibus,” because it is partially a continuing resolution and partially omnibus. CRomnibus includes a provision that would extend the ban on Internet taxes for a year. According to The Hill, Senator Ron Wyden (D-OR), who coauthored the Internet Tax Freedom Act the late 1990s, still remains one of the biggest voices in Congress supporting the elimination of Internet taxes. Senator Wyden said: “A fair and open Internet is an engine of economic growth in America, a launching pad for entrepreneurs and history’s most powerful tool of communication.” 
There have been several FSF blogs in recent months promoting the adoption of the Internet Tax Freedom Forever Act, which would permanently ban state and local taxes on Internet access, pending Senate action. (See here, here, and here.) Although a permanent ban would be preferable, at this point a one year extension of the ban is certainly better than nothing. However, supporters of an online-sales tax likely will push for opposing legislation next year.
If this bill passes (and it looks like it will), it will mean at least an additional year of Internet-driven and market-driven innovation, content, and economic growth.

Tuesday, December 02, 2014

Sony Is the Latest Victim of Online Piracy

Last week, Sony Pictures Entertainment’s email system and other internal systems were hacked by a group called “Guardian of Peace.” This week, five of the studio’s movies were leaked online, including “Fury” and “Annie.” Oddly enough, the two incidents may not be related because it is being reported that the movies, which have been uploaded to many “torrent” websites, were ripped from DVDs.
Online piracy is a serious problem with serious consequences. Two men were recently arrested in London for the their role in leaking the movie “The Expendables 3,” which had over 2.2 million views before it even hit theaters this past summer. The theft of these five Sony movies likely could cost the studio hundreds of millions of dollars before it is over, especially considering that four of the five movies have not been released in theaters yet.
Online piracy is very detrimental to encouraging creative content, so it is important that various groups work together to quickly reduce it. The Motion Picture Association of America recently released a new website,, which helps consumers quickly locate legal content online, in stores, or at the movies theaters. Rightscorp is another good tool that notifies Internet Service Providers, content companies, and consumers when content is pirated online.
Although this recent Sony incident is a step in the wrong direction, hopefully more tools that help secure strong intellectual property rights, like and Rightscorp, will continue to emerge. The protection of intellectual property is essential for encouraging more innovation, creative content, and economic growth.

The Net Neutrality Hybrid Proposals: They Definitely Are Not Comfortable

Let me ask you this: “If a man has one foot in a bucket of boiling water and the other foot in a bucket of ice, do you think that, on average, he would be comfortable?”

Answer: Not really.

Well, if the FCC, for purposes of pursuing further net neutrality regulation, puts one foot in the Title II bucket and the other in the Section 706 bucket, do you think that, on average, the agency is likely, as a legal matter, to comfortably succeed?

Answer: Not really.

Each time I think about the various so-called “hybrid” proposals that agglomerate various aspects of Title II common carrier regulation and Section 706 “commercial reasonableness” authority in the quest for some “compromise” version of Internet provider regulation, I am reminded of the poor rube with one foot in the boiling water bucket and the other in the ice bucket. In the main, the various hybrid versions are offered as a way to avoid the acknowledged adverse effects of applying Title II’s public utility-style regulation to Internet providers and as a way of bolstering the legally problematic case for invoking pure Title II or Section 706 regulation alone.

Initially, I must confess that, for the most part, the hybrid proposals are difficult to understand on their own terms, at least for me. And I’ve been involved with communications law and policy for almost forty years now. On average, the hybrid proposals make me very uncomfortable.

The proffered hybrids come in many varieties, but among them are these. Rep. Henry Waxman has a “springing Title II proposal” whereby the FCC simultaneously would subject Internet providers to net neutrality regulation under Section 706, while also declaring Internet access services to be a telecommunications service subject to Title II. Somehow, Title II regulation would only spring into effect if the FCC’s exercise of Section 706 authority were held unlawful. Rep. Waxman later offered a variation of his “springing” proposal whereby the FCC would classify Internet providers as common carriers but then immediately forbear from imposing all of the Title II provisions, while at the same time relying on Section 706 to adopt bright-line rules prohibiting blocking, throttling, and prioritization of traffic.

Mozilla has put forward a proposal urging the FCC to classify a so-called Internet “edge provider’s” remote delivery of content to a “retail” user endpoint as a common carrier service and then to forbear from any “inapplicable or undesirable provisions” of Title II. In somewhat of a mirror image of Mozilla’s proposal, Columbia law professors Tim Wu and Tejas Narechania propose that the FCC divide Internet access service into a “retail” end user’s request for data and an edge provider’s response to the retail user’s request. Under this hybrid model, the edge provider’s response (or “sender-side’” response as the Columbia professors call it) would be classified as telecommunications subject to Title II regulation, while the retail user’s request for data would not be. Again, the exercise of the Commission’s forbearance authority is invoked to avoid application of harmful regulatory requirements that the Commission may not wish to apply to the sender-side entity.

The various hybrid proposals obviously are complicated, and to some extent contradictory. In reality, so-called edge providers and end users can be one and the same individual and entity, depending on the way they are using Internet access service at any particular time. Indeed, during the same Internet “session,” the supposed roles may switch back-and-forth, depending on the way the Internet is used.

In any event, from a policy perspective, the hybrid proposals are problematical because, in essence, the objective of each is to apply some degree of public utility-style regulation to Internet providers in the absence of evidence of present market failure or consumer harm. In this piece, however, I wish to put aside pure policy arguments and focus on two principal legal defects that pervade the hybrid agglomerations.

To one degree or another, the hybrid proposals depend on the successful exercise of the Commission’s forbearance authority and/or its successful reclassification of Internet providers as regulated common carriers under Title II of the Communications Act rather than as information service providers outside of the public utility realm.

The exercise of forbearance authority: Given the constrained way the Commission previously has interpreted the forbearance authority provision adopted as part of the Telecommunications Act of 1996, it is highly unlikely the agency will be able successfully to forbear from applying some or all of Title II’s burdensome regulatory requirements to Internet providers. This is true even for requirements upon which there is widespread agreement that they should not be applied.

As FCC Commissioner Michael O’Rielly pointed out in remarks at the Free State Foundation’s recent “Thinking the Unthinkable” seminar, the Commission’s insistence on using intensely granular product and geographic analyses, which it has defended in court, requires “such an extraordinary showing of insufficient market power backed by very specific market data, that the forbearance process resembles little of its original intention.” I have made much the same point for many years. Thus, in an April 2011 piece titled “Rolling Back Regulation at the FCC: How Congress Can Let Competition Flourish,” I called on Congress to revise the forbearance provision in a way that would require the agency to more readily grant justifiable forbearance requests.

Furthermore, as Commissioner O’Rielly went on to explain:

“[T]he findings that the Commission would have to make to justify forbearance run counter to the arguments for imposing net neutrality in the first place: broadband providers seemingly have the market power to discriminate against other providers and consumers. In other words, the Commission would be forced to argue that imposing Title II is necessary because of the discriminatory possibilities that broadband providers may inflict on the marketplace but somehow the same broadband providers would be required to show that imposition of parts of Title II are not necessary to ensure just, reasonable and non-discriminatory practices, which is the first part of the statutory test for Section 10 forbearance….”

Harry Houdini has long since performed his last act of trickery, but were he alive, even Houdini couldn’t fool a panel of judges with such an inherently contradictory switcheroo.

Classification under Title II of parts of Internet access: The hybrid proposals put forward by Mozilla and Professors Wu and Narechania (and others) are more exercises in Aristotelian metaphysics than in law compliance. Aristotelian metaphysics “examines what can be asserted about anything that exists just because of its existence and not because of any special qualities it has.” Something like this is what is going on with regard to the proposals to simply declare as separable elements of Internet access service what the Commission previously declared to be a single integrated service. And not only did the Commission previously declare Internet access service to be a single integrated service, it successfully defended this position in the Supreme Court in the landmark Brand X case.

I don't think the integrated, inseparable nature of ISPs' service offerings, from a functional standpoint, and from a consumer's perspective, has changed since the Brand X decision, so it won't be easy for the Commission to argue that it is changing its mind about the proper classification based on changed consumer perceptions of the service offerings' functionality. And to the extent that the Brand X Court cited favorably to the FCC's claims concerning the then-emerging marketplace competition and the dynamism in the broadband marketplace, those factors, if anything, today argue even more strongly for a non-Title II common carrier classification.”

I understand that Tim Wu, Mozilla, and other hybridists suggest that either the “sender-side” portion of the Internet service or the “retail side” portion can be isolated and treated differentially for purposes of regulatory classification. They base this in part on assertions that consumer perspectives concerning the integrated nature of Internet access service have changed since the Commission’s 2002 classification decision. But I have seen no Commission findings in support of this assertion. Moreover, as Justice Thomas declared in the Brand X majority opinion: “The entire question is whether the products here are functionally integrated (like the components of a car) or functionally separate (like pets and leashes).” While Justice Thomas readily acknowledged the deference due to the FCC “in the first instance” under the Chevron doctrine, he said the classification of Internet access “turns not on the language of the Act, but on the functional particulars of how Internet technology works and how it is provided….”

The argument the hybridists now put forward is similar to the one accepted by Justice Scalia in Brand X – but unfortunately for them it was in a dissent. The majority rejected the notion that the “telecommunications” and “information” elements, or the “sender-side” and “retail” end user side, or the “wholesale” or “retail” elements – however cleverly characterized – are functionally separable for regulatory purposes. Should the Commission now attempt to cull out any element of Internet access for purposes of applying Title II regulation, the agency will bear an especially heavy burden. I submit that, upon judicial review, a proper understanding of the law will prevail over a particularly foggy exercise of Aristotelian metaphysics.

In sum, the hybrid proposals do not offer a viable solution for FCC Chairman Tom Wheeler, or others, who may be wary of offending the most fervent net neutrality advocates. To his credit, it now appears Chairman Wheeler, having in mind the difficulties of either a pure Title II or hybrid Title II approach, recognizes the need to take time to reassess the way forward.

It certainly makes sense for the Commission to hit the “pause” button. This is especially so when no one seriously claims that Internet providers presently are acting in ways that cause consumers or competition actual harm.

Mere conjecture concerning future potential harms is not a sufficient reason for the Commission to plow ahead with consideration of hybrid proposals – to put one foot in a bucket of boiling water and the other in a bucket of ice, all the while deceiving itself into thinking, on average, it feels comfy.

Tuesday, November 25, 2014

FSF Seminar Remarks Delivered by Deborah Taylor Tate

Here are the remarks delivered by Deborah Taylor Tate, Distinguished Adjunct Senior Fellow at the Free State Foundation, at FSF’s November 14 policy seminar. Ms. Tate, a former Federal Communications Commissioner, was a panelist at the FSF event titled "Thinking the Unthinkable: Imposing the 'Utility Model' on Internet Providers," held at the National Press Club. Her remarks are well worth reviewing.

Monday, November 24, 2014

Yet Another Court Reinforces State Law Copyrights in Pre-72 Sound Recordings

For the third time in three months, a court has recognized a right of public performance to pre-1972 sound recordings under state copyright law. The latest is a November 14 ruling by Judge Colleen McMahon of the U.S. District Court from the Southern District of New York. The District Court’s opinion constitutes a strongly reasoned vindication of copyright protections according to state common law principles. And it adds more judicial weight to the conclusion that state copyright law protects exclusive public performance rights in pre-72 sound recordings.
As I’ve explained in a Perspective from FSF Scholars essay and in a prior blog post on this topic, the Copyright Act of 1976 largely preempted state copyright law. But Section 301(c) of the Act left state jurisdiction intact regarding rights in sound recordings fixed prior to February 15, 1972.
In Flo & Eddie, Inc. v. Sirius XM Radio, Inc. (2014), the District Court in New York acknowledged that “New York unquestionably provides holders of common law copyrights in sound recordings with an exclusive right to reproduce those recordings.” The question of first impression facing the court was “[w]hether New York provides holders of common law copyrights in sound recordings with an exclusive right to publicly perform those recordings.”

The court affirmed the exclusive right to public performance in pre-72 recordings based on a “look to the background principles and history of New York copyright common law.” Judge McMahon observed that New York jurisprudence affords public performance rights to holders of common law copyrights in plays and films. She similarly observed that “[n]o New York case recognizing common law copyright in sound recordings has so much as suggested that right was in some way circumscribed, or that the bundle of rights appurtenant to that copyright was less than the bundle of rights accorded to plays and musical compositions.”
In her decision, Judge McMahon concluded Sirius XM infringed Flo and Eddie’s common law copyright for public performance of pre-72 sound recordings. Sirius XM reproduced copies of those recordings for its databases and broadcast them through its nationwide satellite radio Internet digital radio services. Yet Sirius XM did not obtain Flo and Eddie’s consent or pay royalties. She flatly rejected Sirius XM’s fair use defense.
The court also concluded that Flo & Eddie established their claim against Sirius XM for the unfair competition tort of commercial misappropriation. As the court explained, “[a]n unfair competition claim involving misappropriation usually concerns the taking and use of the plaintiff’s property to compete against the plaintiff’s own use of the same property.” In its ruling, the court called it “a matter of economic common sense” that Sirius XM’s public performances of Flo and Eddie’s Pre-72 sound recordings harm the copyright holders’ sales and licensing fees.
Finally, the court rejected Sirius XM’s arguments that Flo and Eddie’s state common law copyright claims were barred by the Dormant Commerce Clause. It conceded that Section 301(c) of the Copyright Act of 1973’s exemption for state copyright law in pre-72 recordings “is framed as a limitation on preemption, not a relaxation of Commerce Clause limitations.” However, the court reasoned that “New York does not ‘regulate’ anything by recognizing common law copyright.” It found no basis for holding that “a state’s general property law and associated liability principles could, in and of themselves, violate the Dormant Commerce Clause.” Rather, “concluding that Sirius is liable under New York property law principles would not amount to a ‘regulation’ of interstate commerce by New York.”
As Judge McMahon aptly put it, “the common law, while a creature of the courts, exists to protect the property rights of the citizenry.” Property includes the products of an artist’s “intellectual labor,” such as sound recordings created through the time, effort, money and skill of the artist. Exclusive rights of public performance are appurtenant to that right of property.

In yet another important ruling concerning pre-1972 sound recordings, the District Court’s ruling rightly reasoned from the underlying principles of New York common law to protect rights in intellectual property.

Friday, November 21, 2014

2014 Global IP Summit - Senator Chris Dodd Spoke about Piracy and Motion Pictures

At Tuesday’s Global IP Summit former US Senator and current Chairman and CEO of the Motion Picture Association of America (MPAA) Chris Dodd gave an important speech on the positive impact strong IP rights have for the motion picture industry. Some of the key impacts Senator Dodd mentioned were:
  • Online consumers legally accessed more than 5.7 billion films and 56 billion television episodes in 2013 alone. 
  • Over 1.9 million people are employed by the American film and television industry. 
  • There was $120 billion in sales and $16.2 billion in worldwide exports in 2012 alone.
Despite the billions of dollars in sales and exports, theft of IP, specifically online piracy, is a very serious problem for movie producers and distributors. (See this blog from the summer about “The Expendables 3.”) Senator Dodd cited a Digital Citizens Alliance report which concluded that ad-supported piracy generates $227 million annually. This astonishing number should reinforce the idea that even stronger IP rights and more effective enforcement regimes could benefit the motion picture industry as well as other segments of the American economy that produce creative content, such as musicians and recording companies. Senator Dodd then went on to say something powerful: 

Indeed, one of the Internet’s greatest strengths is that it is not a centralized network. No single entity, government, corporation or individuals controls it. But, conversely, no single entity can solve its problems. That is why it is vital for responsible actors, to work together to reach commercially reasonable and technically feasible solutions if we are going to reduce piracy, and stimulate innovation.
This is why Senator Dodd promoted MPAA’s new search engine for legal content, (See my blog from last week.) He called it a “one-stop shop, connecting users directly to [more than 100] legal content sites.” Although the serious problem of harmful online piracy may still remain and needs to be combatted, should help reduce piracy by organizing legal content and placing it at the fingertips of Internet users.
MPAA is also exploring other voluntary initiatives that would warn Internet users when they have downloaded illegal content and then direct them towards legal content websites. MPAA is certainly doing its part in trying to diminish online piracy and help secure stronger IP rights. A robust system of IP rights is vital for encouraging more content, innovation, creativity, and economic growth because it allows entrepreneurs and artists to realize the returns from their labors.

Wednesday, November 19, 2014

2014 Global IP Summit

By Randolph May and Michael Horney

The US Chamber of Commerce’s Global Intellectual Property Center held its 2nd Annual IP Summit yesterday with a prestigious list of speakers, and we were both pleased to attend the conference. Senator Chris Coons (D-DE) and Representative Bob Goodlatte (R-VA) were the two current members of Congress who spoke. There were also many Presidents and CEOs representing successful IP-related companies and organizations, as well as other speakers with heavy involvement in IP-intensive industries.
A principal, notable takeaway from the IP Summit is the message conveyed by the broad range of sponsors for the event. Just to name a few of the wide variety of businesses and organizations – The App Association, American Beverage Association, Biotechnology Industry Organization, CropLife America, Motion Picture Association of America, Pharma, and Software & Information Industry Association – their involvement in the IP Summit is a demonstration of the significant benefits from strong IP rights and effective enforcement regimes.
This broad range of sponsors is itself an indication that the protection of IP rights (whether copyrights, patents, trademarks, or trade secrets) is important to the success of many industries that span around the globe and benefit consumers worldwide.